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[Economy] Bretton Woods and Fixed Exchange Rate system : Meaning Explained
Posted By On 27/10/2012 @ 10:27 pm In Economy | 86 Comments
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While reading newspaper columns about global economy or Eurozone crisis etc. you may have come
across a sentence, multiple times : we need another Bretton woods. so,
What is Bretton Woods?
Its a place in New Hampshire State of USA, just like BASEL is a city in Switzerland.
Why is important?
In 1944, President Roosevelt hosted a conference here, to rebuild the world economy, after Second
World War.
Delegates of 44 allied nations ( ) had came to participate in this conference.
Officially it is known as United Nations Monetary and Financial Conference, commonly known as
Bretton Woods because of the place where it was held.
This conference resulted into creation of four extremely important things
They give short-term loans to help nations settle the balance of payment crisis.
Theyve a system called SDR :Special Drawing rights. (requires another article)
2. World Bank
Officially known as IBRD :International bank for reconstruction and Development, that time
They give long term soft loans to rebuild the third world.
Soft loans= interest rate is very low. Sometimes you dont have to pay back the principle.
3. GATT (General Agreement on Trade and Tarrif) later becomes WTO
To facilitate the international trade.
This will later become WTO. Already written an article on this.
4. Fixed Exchange Rate system. (although Discarded in 1970s)
Explained in this same article.
Agenda of conference
Help rebuilt the World Economy. Provide money, loan, finance to needy nations. (World Bank)
After WW2, lot of colonies will get independence (India, Sri Lanka), theyll introduce their own
national currencies without control of big superpowers (Britain, France etc) and theyll enter in
international trade in their own capacity.(Exchange rates, IMF)
Hence, Some rules/order had to be created to facilitate smooth international trade. (GATT)
President Roosevelt: Because Ive the aukaat to pay enough gold, so I say dollars will be the international
reserve currency. IF youve enough gold reserve in your RBI, come sit in the chair and well see whether
rupee is strong enough to become the international reserve currency or not.
Even Britain is so financially bankrupt after Second World War, they dont have the guts to tell me set this
exchange rate according to their Pounds. Btw, I also got some nuke missiles in my limousine.
Mohan: no noI was just kidding man. Im well aware that youre the superpower both financially and
militarywise.
President Roosevelt: Besides When weve a stable and fixed exchange system like this, itll ensure smooth
and long term trade deals between merchants of various countries. When you dont have fixed exchange
rate system, it is bad for economy. For example, today your call-center boss may give you free lunch and
coffee because $1=60 rupees but next day when value of rupee declines and it is $1=50 rupees, same
boss will even stop running the water-cooler in your office. Third day when $1=40 rupees, He will just kick
you out because outsourcing generate that much profit for him. Such uncertainty, is not good for
economy.
And since Gold is in limited supply, Dollar will be spent carefully, and so your currency will be in spent
carefully. i.e. Since currencies are pegged, you will not indulge in extravagant spending in subsidies,
welfare schemes, tax-reliefs or debt-waivers to farmers. This ensures fiscal discipline => That ensures less
Fiscal deficit = less inflation.
Mohan: Mr. President Sir, I think I got the point now. Ill tell my RBI Governor here to sign the Bretton
Woods agreement papers, because fixed exchange rate system sounds safe and good.